Read on to explore the impact of juggling various loans and credit cards on your creditworthiness and how Bajaj Finance can help you keep track and make smarter decisions.
Are you planning to apply for a loan or a credit card? Do you already have more than one loan and/or credit cards? If yes, then you should be aware that it can impact your CIBIL Score. Your CIBIL Score is a three-digit number between 300 and 900 that reflects how reliable you are with credit. Banks and financial institutions refer to it in order to gauge whether it is safe or risky to approve your application for financial products, and to decide their terms. A CIBIL Score of 750+ is considered ideal and represents a solid reputation of responsible credit behaviour, making it easy to bag approvals and favourable terms and conditions when you require credit.
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There are many factors that contribute to the calculation of your CIBIL Score to varying degrees, as the table below illustrates:
Having multiple loans and credit cards impacts each and every one of these contributing factors, thereby affecting your CIBIL Score. The most significant impact is on your credit utilisation and payment history.
How do multiple loans and credit cards impact your credit utilisation?
Your credit utilisation ratio is the percentage of your available credit limit that you are using. For instance, if you have a credit card with a limit of Rs. 50,000 and you have used Rs. 25,000, your credit utilisation ratio is 50%. Having multiple loans and credit cards increases your credit availability, and this might seem like a good thing. However, having access to more credit has its own set of drawbacks. It’s like having too many choices at a buffet – it might be tempting to pile your plate to get a taste of everything, which will ultimately leave you feeling bloated and unwell. Similarly, with multiple credit products, there’s always the risk of overspending and accumulating higher debt because of how challenging it can be to manage your credit utilisation ratio effectively. Ideally, you should aim to maintain a credit utilisation ratio of 30% or lesser, to assure lenders that you’re not overly dependent on credit.
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How do multiple loans and credit cards impact your payment history?
Another challenge with multiple credit products is the risk of payment delays and defaults, which too can harm your CIBIL Score. Making timely payments is crucial to your credit health, and it can become quite a task to do that and keep track of due dates when you have multiple loans and credit cards to handle. Missed payments and defaults not only promptly shoot down your CIBIL Score, but also damage your future prospects with regard to successful credit applications as they remain on your credit report for up to seven years. Lenders view it as a red flag, meaning they either reject your applications outright or provide you with unfavourable terms and high-interest rates that only add to your burdens.
How do multiple loans and credit cards impact other contributing factors of your CIBIL Score?
It’s always advisable not to terminate old credit accounts as they add to the length of your credit history, thereby signifying an established track record of responsible credit usage and positively aiding your credit score. It’s always a good idea to keep an old credit account in good standing through at least occasional usage and timely clearing of its balance.
Just like a balanced diet ensures your physical well-being, a healthy mix of credit types helps boost your CIBIL Score. A diverse portfolio comprising, say, a credit card, a car or home loan, and a collateral-free business loan indicates your capability in handling various kinds of debt.
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However, this does not mean that you apply for credit products that you do not need. Every time you make such an application, it leads to a ‘hard enquiry’ on your credit report, too many of which within a short duration raises alarm among lenders as they suspect you to be credit-hungry. Each enquiry remains on your report for up to two years, so make sure you only apply for credit when actually necessary.
Strategies for managing multiple loans and credit cards
While they do pose many challenges, there are ways to handle multiple loans and credit cards wisely. Here are some strategies you can implement to manage your finances better when you have multiple credit cards and loans:
Strategy #1: Maintain a good payment history
Pay your bills on time to avoid defaults and late payments. If necessary, set up reminders or automate your payments so you never miss a deadline and can maintain your CIBIL Score in good health.
Strategy #2: Keep your credit utilisation in check
Regularly monitor your credit utilisation ratio to remain within the healthy range of 30% or lesser. Maintaining such a balance between your credit utilisation and available credit limit is crucial for a good CIBIL Score.
Strategy #3: Consider debt consolidation or closure of unused accounts
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If you’re finding it challenging to manage multiple credit products, debt consolidation can be a path worth exploring. Think of it like decluttering your financial space so you have better clarity on your financial situation and can organise it with greater ease. Alternatively, you can close unused credit accounts to reduce the temptation to overspend and streamline your credit profile.
Importance of monitoring and regular credit checks
The significance of monitoring your credit report and checking your credit score regularly cannot be overemphasised. Think of it as taking your financial pulse. Regular checks can help you detect errors, inaccuracies, and fraudulent activities that may be weighing your score down. Report any discrepancies to the relevant credit bureau so that the issue is resolved promptly. Timely identification and redressal of such issues is vital to maintain an accurate and healthy credit profile.
Your CIBIL Score will thank you and you will have a solid foundation for achieving your financial goals if you remain committed to disciplined credit behaviours and make informed decisions. Responsible credit management can seem overwhelming, especially if you have multiple loans and credit cards. That’s where Bajaj Finserv Credit Pass can come to your rescue. This unique CIBIL-powered subscription comes with a personalised dashboard that offers you a comprehensive overview of all your credit accounts for effortless management and real-time tracking. Ensure you never miss a deadline, have all the tips and tools you require to make informed choices, and have unlimited credit score checks to keep you in the loop.
